Herbalife: A ‘Ferrari’ Going to $300 Before LBO, Says Chapman

By Tiernan Ray

Following word a short while ago that George Soroshas taken a position in Herbalife (HLF), Robert Chapman, founder of Chapman Capital, who counts the stock as one of his largest holdings, came on CNBC‘s “Fast Money: Half Time Report” with Scott Wapner to discuss how the company could go to $300 per share some day, and to take swipes at the stock’s chief nemesis, Pershing Square’s Bill Ackman, who earlier this year announced a substantial short position in Herbalife shares.

Herbalife stock is up $4.83, or 8%, at $64.87, after Monday afternoon reporting better than expected Q2 results and raising its full-year outlook.

Chapman refuted Ackman’s claims Herbalife is a pyramid scheme, saying “it’s a real company, selling a real product, to consumers all over the world.”

Asked about Ackman’s press release issued Tuesday morning, in which Ackman picked apart what he characterizes as “weak” operating results in the quarter, Chapman quipped “When I saw the Pershing Square press release come across my desk, I truly said to myself that these are really good questions to be asking — of JC Penney (JCP), not Herbalife.”

“Herbalife is a Ferrari,” said Chapman.

Asked about the stock’s valuation, Chapman said “today I think the stock should be trading at $75, and I get that with a 15 multiple on $5 per share of earnings in 2013.”

But, he continued “I think the stock is going to $300. And I’ll tell you, I use as my template for Herbalife the similarities to Philip Morris (PM) 13 years ago.”

Like Philip Morris, you have a company with mid-single digit enterprise to Ebitda multiple, you have regulatory risk that is the driver of that low valuation; you have massive — massive – free cash flow aggressively used for buybacks; they have an international spin-off solution to any U.S. regulatory issue. Phillip Morris makes products that kill people, millions a year, Herbalife makes a shake that saves lives.

As far as reaching that $300 target, Chapman opined it will probably happen before the stock gets taken out in a leveraged buyout, which he thinks will, indeed, happen some day:

You have two scenarios here. If it stays public, they will buy back stock at a steady pace, with periodic shock and awe repurchases of $1 billion to $2 billion. A leveraged buyout is in Herbalife’s DNA … At some point, Herbalife will get LBO’d again. But it will be in 5 to 10 years from now, at $300 a share, rather than $95 to $100 in 2013.

Wapner asked Chapman how much of the battle over Herbalife is a personal dislike for Ackman on his part:

Well, I would like to take a page from Carl Icahn: Making money in a stock is fun. Making money when Bill Ackman is losing money is like a ride in the circus. It really is the cherry on top. When someone as sanctimonious as Bill Ackman tries to put them out of business, and I can double or triple my money while he’s not covering a single share, that’s like Christmas every month.

Wapner asked Chapman whether he truly believed Ackman has not covered any of his short position, as he claims, given the stock has almost doubled this year.

Said Chapman,

I believe Ackman has some prudence left, and he would cover. But he has a huge reputational and business risk in covering the stock after he went on your show and after he said this was his single best idea ever, full stop. If this is your best idea ever, and you don’t cover at $35, $40, $55, $60, etc., what does that say about your business?

Wapner asked Chapman to at least give Ackman credit for his long-term performance. He replied:

I’ll give him more than a little credit. He made the most spectacular hedge fund investment in the history of Wall Street with [shopping mall REIT] General Growth Properties (GGP). He bought that little equity sliver at a time when the entire world was melting down [during the financial crisis] and held onto it as long as he did, and that’s probably been a 20 or 30 bagger.

Chapman was also asked about Ackman’s announcement this morning that he had made his largest investment ever in Air Products & Chemicals (APD), Chapman said that Ackman’s kind of activism “is a way to put up good numbers” and so the investment “probably works out.”

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.